Debt, Inequality and House Prices: Explaining the Dynamics of Household Borrowing Prior to the Great Recession
Alessia De Stefani
ESE Discussion Papers from Edinburgh School of Economics, University of Edinburgh
Growth rates of income inequality and household debt levels are strongly correlated within OECD economies. I explain this evidence through the role of collateral capacity and mortgage lending. My analysis of disaggregated US data in the decade preceding the 2007/2008 financial crisis shows how the rise in income inequality across US regions was associated with a higher than average increase in house prices. Exploiting geographical variation across US regions, I apply a methodology which can be considered similar to a diff-in-diff approach. I show that between 1997 and 2007 a 1% increase in inequality, measured as the ratio of top incomes to median incomes, determined an increase in the the self-reported value of homes of about 0.6% across US states and 0.7% across metro areas. Inequality therefore induced a wealth effect in homeowners. I also show that the increase in housing wealth was associated with higher consumption, despite constant real income. A 1% increase in top incomes induced a 0.46% increase in 'non-rich' homeowners' consumption, and a 0.18% increase in mortgage debt. The wealth effect experienced by homeowners living in high-inequality regions can therefore explain the link between inequality and house-hold debt without recourse to behavioral explanations such as the 'conspicuous consumption' hypothesis.
Keywords: Consumption Behaviour; Credit; Inequality; Veblen Effects; House Prices (search for similar items in EconPapers)
JEL-codes: D12 D14 D31 G21 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:edn:esedps:259
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